BULLS RUNNING?

Over the weekend I was reading a few articles that were very positive about the positioning of the US economy and how the economy was going to grow because companies had stopped borrowing to pay for dividends and were starting to invest in capex. In similar articles, I was also reading how the economists and strategists were similarly placed in their prediction for next years’ market performances.

Sadly, the predictive power of strategists and economists are poor at best and the numbers seem to suggest otherwise. Firstly, to grow at the 3% growth rates that the GOP suggest is doable requires a workforce and people joining the workforce. Current politics is making that task difficult. Secondly, the economy already is at full employment but getting older, so where are the workers going to come from? Lastly, the statistics suggest something different.

If companies are going to borrow, then loan growth should be growing. Instead the 12-month loan growth rate at U.S. banks in the third quarter hit its lowest level since 2013. This marks the sixth consecutive quarterly decline for loan growth. Growth in each of the four major lending categories measured by the FDIC fell. Business lending is at its lowest since 2011. Whilst loan balances have risen, the slowing rate of growth is defying expectations.

The slowdown in lending growth raises valid questions over prospects for 2018. The difference between 10-year and two -year U.S. treasury debt is a proxy for bank profitability. That stands at less than 60 bp, the lowest point for a decade. Loan growth at JP Morgan Chase and BA grew at 3%, Citigroup Inc posted 2% whilst Wells Fargo fell 1%. Business lending growth rates fell to 2.48% from 2.79% for the quarter and 7.67% from a year ago.

The strategists and economists, however, are pointing to buoyant trading conditions for 2018 with a number trying to outdo the other with an even higher speculated expected return. A number have double digit growth rates. Sadly, though the truism of life is that when everyone in the herd is heading in the same direction rarely does the prediction become true.

Many strategists have struggled in their predictions because of loose monetary policies. The models are unable to cope or make any sensible predictions with about $10 tr of central bank money sloshing through the system. Most models have inflation at a higher level, yet inflation continues to defy on the low side. Many bond traders are now even starting to question the Fed and the number of tightenings that the Fed can do. That probably explains away a little of the rally in 2-years Friday. Fed Fund futures out to December 2018 have Fed Funds at 98.2 (1.8%). That’s a prediction of two rate hikes over the year. Watch Yellen’s speech this week and the Fed Board members who are also talking this week as the lack of inflation is now a hot topic.

So, what do we know? The bond market has defied expectations and the Trump trade has failed to materialise yet. The Corporates are issuing but they were also looking to reduce taxable income by investing in their pension plans before a tax loophole was closed. This meant more money into pension funds that were buying bonds. Pension funds concerned about valuations have rotated into bonds, thus causing further unexpected flattening.

Real yields have been rising as implied by TIPS.

Credit issuance is on track to hit a record for 2017. Corporate debt to GDP is hovering about 45%. Previously, when Corporate debt to GDP was at these levels a sharp correction has occurred.

Equity tech shares have out-performed and small caps have caught up to the broader market on hopes of lower taxes.

Oil and gas pipeline firms are diverging from crude oil, something has to give.

ETF investors moved into low vol strategies over the week. The Vix is at 10 again and there have been 67 consecutive days of smaller than 1% intraday trading moves.

And if you wondered what happened to the $1 k you invested in a number of major stocks 10 years ago, here is the result. If you bought Netflix you are now worth $52k, Amazon $12k, Apple $6k, Alphabet $3k, GE $ 490, Pfizer $1.4k and Coke $1.5k.

Recap:

Bonds: the 2-year rallied to close at 1.72. The U.S. 10-year closed at 2.34% a slight rise in yield. The 30-year closed at 2.76 % up 2 bp. The 2/10 closed at 59.4, the 2/30 at 101.6 bp and the 10/30 closed at 42 bp. The European 10-year benchmark closes were, gilts closed at 1.247%, bunds at 0.358% and OAT’s 0.532%.

Commodities: Gold fell about 0.2% and WTI rose 1.6%. Copper rose 0.6%

Aussie Market Today.

Aussie bonds will continue to go their own way today and are likely to rally slightly. The market appears to be quiet but steady.

Equity markets will continue to push ahead and continue the rally.

Geopolitical tensions are still a concern although tensions appear to have been cowed for the moment.
Demand for solid investment grade credits look likely to continue as the hunt for higher yielding assets continues to gather pace.